In the sprawling outskirts of Chongqing, a megacity of 21 million, a shopping mall showroom has become a symbol of desperation in China’s automotive sector. Here, buyers can browse among 5,000 new vehicles, with deals that defy logic: locally produced Audis slashed by 50%, and a seven-seater SUV from state-owned FAW going for about $22,300—more than 60% below its original price. These fire sales aren’t anomalies; they’re symptoms of an industry drowning in excess inventory, where carmakers are offloading stock at losses just to keep factories running.

This glut stems from years of aggressive government policies that have prioritized production targets over actual market demand, leading to massive overinvestment. Carmakers, spurred by subsidies and directives to dominate the global electric-vehicle market, have ramped up output far beyond what consumers can absorb. The result? A vicious cycle of price wars, dealer distress, and irregular practices rippling through the supply chain.

The Overproduction Trap: How Policy Fuels Chaos

According to a deep investigation by Reuters, China’s auto industry is mirroring the boom-and-bust patterns seen in its property and solar sectors. Government incentives, including billions in subsidies, have propelled the country to become the world’s EV leader, but at the cost of sustainability. Production capacity now far outstrips demand, with estimates suggesting over 100 domestic brands churning out vehicles in a market that can’t sustain them all.

Insiders point to local governments exacerbating the issue by tying economic growth metrics to factory output, pressuring companies to build and produce regardless of sales. This has led to “lose-lose transactions,” where dealers are forced to buy unwanted inventory, often resorting to tactics like fake registrations or exporting at a loss to meet quotas.

Price Wars and Dealer Despair: Ground-Level Impacts

The fallout is stark: profit margins have evaporated, with many dealers operating at a loss. In one case highlighted by BNN Bloomberg, showroom operators in major cities are slashing prices to move stock, yet inventories continue to pile up. Fierce competition from giants like BYD and emerging players has intensified, with electric vehicles particularly hard-hit as subsidies wind down and consumer caution grows amid economic slowdowns.

For industry executives, the parallels to past overcapacity crises are ominous. As Automotive News reports, more than 100 brands are vying for dominance, but policy-driven production targets ignore consumer trends, leading to a potential shakeout where weaker players could collapse.

Government Responses and Future Risks: A Path to Recovery?

Beijing is beginning to acknowledge the problem. Recent guidelines from the Ministry of Industry and Information Technology set a modest 2025 sales target of 32.3 million vehicles, below industry forecasts from the China Association of Automobile Manufacturers, signaling a push for tighter regulation. Yet, as detailed in a MarketScreener analysis, these measures may be too little, too late, with overcapacity estimated at 20 million units annually.

Experts warn of broader implications: if unchecked, this tailspin could drag down suppliers, jobs, and even China’s export ambitions in EVs. For global rivals, it’s a cautionary tale of how state intervention can distort markets. Still, some see opportunity in consolidation—survivors like BYD might emerge stronger, but only if policymakers shift from quantity to quality. As the sector teeters, the question for insiders is whether China can steer its auto juggernaut back on course before a full crash.